Economic and financial forces shaping modern markets

Economic and Financial Forces

The export-import operation will include exporting grain to Germany and the UK and importing cars from both Germany and the UK into the U.S. The operation will involve the export of 1,000 tons of grain, while the import of cars will number 1,000 cars. If one rates, on average, the cost of importing the car (total cost = cost of the car + cost of transport + cost of insurance) at an average $20,000, then the total cost of the import would be $20,000,000. Similarly, the cost of the ton of grain can be estimated at $10,000 and the total income from exporting the grain is $10,000,000.

On July 25, the exchange rates for the euro (currency in Germany) and the British pound (United Kingdom) were as follows:

GBP = $1.5424

Euro = $1.2911

As such, the income and expenses are as follows:

Car import from UK

Total in USD/Exchange rate = 12,966,804 GBP

Grain export to UK

Total in USD/Exchange rate = 6,483,402GBP

Car import from Germany

Total in USD/Exchange rate = 15,490,666 Euro

Grain export from Germany

Total in USD/Exchange rate = 7,745,333 Euro

There are several things to be taken into consideration when analyzing the impact of the currency exchange variation on the income and expenses of the company operating in the U.S. In both Germany and the UK cases, if the euro and, respectively, the British pound, grow in value over the U.S. Dollar, then this would be advantageous for the export to the respective countries (which are paid in the local currency and, as such, would be more expensive), but less advantageous for the imports, for which the U.S. would need to pay relatively more U.S. dollars (the imports would be paid in U.S. currency, which would be weaker).

However, there are several other things that need to be taken into consideration when analyzing the profitability of this venture. If an international crisis, such as a drought appeared, it would be essential to analyze how this affects the product that the U.S. is exporting (grain) and the product it is importing (cars). In terms of the first, if the grain production in the U.S. is not affected by the drought, then one can say that the exported grain is relatively more expensive, because of a constant demand compared to the decreasing supply (due to the drought) on the market. The U.S. would then be able to charge more for the product it is exporting. The car industry is not affected by the drought, but it could be affected by a problem in iron supply, affecting the production of cars. If this occurred, it depends how the car producing industries in Germany and the UK are affected by this and whether they can find alternative sources of supply.